A board of directors at Awash International Bank (AIB) has decided to pay lower Earnings per Share (EpS) to shareholders from a profit that has seen marginal growth in the bank's operations from the year 2011/12, compared to the previous year.
Despite a year financial analysts describe as a "successful year" for AIB, its leaders have opted prudence in the long term interest of the Bank; they have shown conservative approach in sharing the net profit the Bank made after tax, reaching at 394.4 million Br. This figure represents a 9.4pc marginal increase compared to the 2010/11 fiscal year. However, EpS has declined for the year down to 469 Br, short of 91 Br from the previous year. Directors have rather decided to recapitalize the bank by 24.2pc more compared to growth seen in the previous year. As 912.2 million Br, directors have positioned the Bank to be the largest capitalized bank in the domestic banking industry. Its current capital is also 38 times larger compared to the 24.2 million Br initial capital it had when it was registered by the central bank as the first private commercial bank in 1995.
Their latest move shows to which side of the debate the Bank wants to put itself in the industry, according to analysts. There are those, such as Dashen bank, which were seen rewarding their shareholders with fat EpS, while adding to their capital marginally. Those at banks such as United and Awash seem to prefer to deprive their shareholders now, hoping that consolidation in the market will bring more gains to shareholders in the future. They are proven to be rather risk averse.
"Enhancing the Bank's capital avoids risk that could happen in a volatile business environment in the future," Tsehay Shiferaw, president of AIB, told Fortune.
To his credit, AIB is among the best performance in the Ethiopian banking industry, analysts say. It has particularly been strong in the areas of financial intermediations that keep the Bank at the top of the nation's private commercial banks.
The total revenues of the Bank exceeded a billion million Birr, surpassing the figure of the preceding financial year by 19.7pc. Deposit mobilization effort of AIB has been successful, too. It has mobilized 9.2 billion Br, an increase of 18.9pc.
The growth in loans and advances, as well as deposit increases makes AIB in the first league among its peers.
"That is a commendable achievement," Abdulmena Mohammed, accounts manager for the Portobello Group Ltd, aLondonbased holding company, commends.
Shareholders too are content.
"I'm really happy that the Bank strives for excellence in charting out its future," Selamawit Getachew, a shareholder who attended the Bank's annual meeting, held at the Hilton Hotel on November 17, 2012, told Fortune.
Nonetheless, such feet have not been marked without a challenge to the Bank's management. Increased loan disbursements, coupled with huge investments in the National Bank ofEthiopia's (NBE) bonds, have slashed Awash's liquidity base, as confirmed by various liquidity ratios.
Tsehay concedes that NBE's bills purchase directive, which compelled commercial banks to spend 27pc of their loans and advances in the form of medium term bonds, at low interest rate of five per cent, has had its toll on AIB's overall performance.
In fact, AIB's bills purchase from the central bank grew by 56pc, and reached 2.4 billion Br, claiming nearly half of the total loans and advances it had extended. In the previous subsequent years, these figures were 15.69pc and 20.51pc. Its investment with the central bank makes Awash the largest buyer of five-year bonds.
"The past should be treated as an opportunity to learn for the future," said Wole Gurmu, chairman of the board of directors, in his report published in the annual report, but referring to the economic slowdowns seen in the United States, China and India.
He was referring to declines in the Bank's stock of foreign currency reserve.
The decline in foreign currency earnings by 34.7pc has contributed to the shrinking of non-interest incomes. AIB's decline of its foreign exchange stock is nearly five points larger than what is seen in the industry average.
"Remittance has shown improvement in the last fiscal year," said Tsehay. "Drop in the price coffee exports to the international market has affected the income from foreign exchange."
Another area of non-interest related activities the Bank performed poor was in commissions and service charges it had collected. While almost all private banks reported growth in these areas, AIB's income has dropped marginally by 2.26pc. The average industry growth here was about 40pc.
"The unusual decline of Awash's income in what is a growth area ought to be a source of serious concern to the management of the Bank," Abdulmena warned.
Neither can its cost of business a source of complacent to its managers. AIB has incurred a total expense of 508.13 million Br in 2011/12, an increase of 36.3pc, slightly above the industry average. Interest payment of 284.94, an increase of 36pc, takes the lion share.
The sharp increase in the amount of fixed deposits largely reflects the positive impact of upward revision of interest rates on same due to a cut throat competition among private banks, a development emerged in recent years.
"This presumably has somewhat affected the profitability level of our Bank," Tsehay concedes.
The Bank has increased its loan and advances by 39.2pc to 5.3 billion Br and has impressively improved its loan to deposits ratio to 58pc, from 49.7pc.
Bringing the total number of branches to 86 in the last fiscal year indicates that the Bank's leadership gives a lot more attention to aggressive deposit mobilization efforts.
"We're working in replacing the existing core banking solution with a new one in order to improve the quality of services we provide and come up with new banking products," Tsehay told Fortune.
In collaboration with Nib and United banks, AIB has jointly established a company, Premier Switch Solutions S.C., to launch joint operations and management of electronic payment system.